JPMorgan Chase, the banking giant, is bracing for lawsuits over the Madoff affair, after admitting that it pulled its own money out of hedge funds linked to the Wall Street swindler while leaving hundreds of European clients exposed.
Those clients have lost at least an estimated $30m (£21m) after the former Nasdaq chairman Bernard Madoff was revealed to be running the largest Ponzi scheme in history.
JPMorgan bankers in London created $136m of complex derivatives that allowed investors to bet on the performance of two Connecticut hedge funds, whose steady profits had become the envy of the industry.
The funds, run by Fairfield Greenwich, a firm founded by a long-time associate of Mr Madoff, Walter Noel, had been channelling money to Mr Madoff.
The bank did not sell the derivatives directly to clients, but instead to distributors who marketed them to wealthy individuals and fund managers across Europe. And because it would need to pay out on the instruments in proportion to Fairfield's returns, JPMorgan put $250m of its own cash into Fairfield. However, the bank pulled that money out in the early autumn, after a review suggested the investment could be at risk. It became concerned about a lack of transparency after receiving unsatisfactory answers to questions that it had posed to Fairfield's custodian bank.
Now, furious investors in Italy and elsewhere in continental Europe are considering suing JPMorgan for not publicising its doubts. The majority of the derivatives came with insurance against losses, but $30m in higher-yielding notes did not. People involved in the review at JPMorgan were said to have understood suspecting fraud was not sufficient reason to inform clients, since such a move would raise defamation concerns.
Yesterday, the bank said: "Following the close of the Bear Stearns merger last summer, we did a wide-ranging review of our hedge fund exposure. We took a risk management view to reduce these and other exposures."